College Cost Reduction Act Helps Students Meet Payments

The College Cost Reduction and Access Act of 2007 was signed in September 2007, providing assistance to families who are struggling to pay college costs for their children. The act provides nearly $20 billion in financial aid to students and their parents up to 2012. Perhaps best of all, this aid comes at no new taxpayer expense - existing federal subsidies are being reduced to cover the cost of this bill. This act could benefit not only low - and middle-income students, but upper-income students and families as well. Read on as we cover the major provisions of this act and how you can benefit from this new legislation.

Lower Loan RatesA key benefit provided by this act is the drastic reduction of interest rates on subsidized Stafford loans from their current level of 6.8% down to 3.4%, to be pro-rated between 2007 and 2012. The first drop in rates will go into effect in July of 2008, with subsequent rate reductions following through 2012. While the actual amount saved by students will obviously vary according to the size of their loan balances, the dollar reduction in payment amount for students with larger balances could easily add up to $1,000 or more per year. (For related reading, see Loan Deferment Saves Students From Disaster.)

Good and Bad News for 529 Plan SaversThe new legislation also brings a change in the way that financial aid is determined for 529 plan beneficiaries. The good news is that if the owner of the plan is not the student's parent, then plan withdrawals will not be counted as income or assets on the FAFSA form. However, withdrawals from any 529 plan that is owned by the student will be counted as income in the financial aid formula, thus reducing the amount of aid for which the student is eligible. Therefore, it may now benefit both student and parent savers to transfer the ownership of the student's 529 plan to a grandparent or other third-party owner in order to avoid this dilemma. (To learn more, read Choosing The Right Type Of 529 Plan.)

Improved Terms of PaymentAccording to the new legislation, new graduates who are struggling to make ends meet on a small paycheck can opt for a new program that will recalculate their loan payments according to a more forgiving formula. The new formula limits the amount of the graduate's monthly loan payment to 15% of his or her discretionary income. But the best part is that after 25 years, any remaining debt is automatically canceled. This is a huge windfall for students such as those in the medical or dental professions, who can easily amass student loan balances of $200,000 or more. Unfortunately, this provision is only valid going forward, and will not apply retroactively. One important caveat to this provision is that if the payment is capped at an amount that does not cover interest, that interest is added to the loan balance, thus lengthening the repayment period and increasing the overall loan balance. Therefore, graduates should think carefully and calculate the possible effects of entering this program before committing. (For more on debt repayment, see Digging Out Of Personal Debt and Can You Live A Debt-Free Life?)

Big Breaks for the Socially ConsciousStudents that go on to work as teachers or social workers will have the remainder of their student loan balances forgiven after making 120 payments. Again, this provision is only valid going forward, and the schedule begins with payments made after October 1, 2007. The only possible disadvantage of this program is that under the current provision, the remaining loan balance will be considered taxable income to the graduate in the year that it is forgiven. Furthermore, upfront tuition assistance for students who agree to become public teachers in poverty-stricken schools or in subjects with a high need will be made available. But teachers are not the only beneficiaries of this provision; graduates in the other public service sectors, such as law enforcement and firefighting, will be eligible for forgiveness of up to $5,000 worth of loans as well.

Bigger Pell Grants and Higher Loan LimitsLower income students will be able to receive an additional $500 in Pell Grant scholarships up to 2012, which could bring the total Pell Grant limit to more $5,000 in some cases by 2013. Pell Grants will now become available year-round too, and this could benefit approximately 5.5 million students altogether. Approximately 600,000 additional students will become eligible for these grants as well. Finally, the College Savings Act raises the amount of money that students can borrow, thus reducing their dependence on more expensive loans from the private sector. (For related reading, see Preparing Parents' Pockets For College Tuition.)

Miscellaneous ProvisionsThe College Savings Act also contains an assortment of smaller provisions that will help students defray the costs of their education. They include:

Making the financial aid process more streamlined

Helping students plan for textbook costs in advance each semester

Fortifying college readiness programs

Improving tuition and fee support for military and veteran students

Making college campuses safer and providing increased assistance for schools trying to rebuild after a disaster

Mandating equal opportunity for disabled students

Increasing the emphasis on science, technology and foreign language education

ConclusionThe College Cost Reduction and Access Act of 2007 has a little something for everybody. Undergraduate students and the parents of future college students should take the time to become familiar with this act to determine which provisions may be of benefit.